WISCONSIN ELECTRIC POWER COMPANY CORPORATE DEVELOPMENTS
Introduction
We are a wholly owned subsidiary ofWEC Energy Group , and derive revenues from the distribution and sale of electricity and natural gas to retail customers inWisconsin . We also provide wholesale electric service to numerous utilities and cooperatives for resale. We conduct our business primarily through our utility reportable segment. See Note 19, Segment Information, for more information on our reportable business segments.
Corporate Strategy
Our goal is to continue to build and sustain long-term value for our customers andWEC Energy Group's shareholders by focusing on the fundamentals of our business: environmental stewardship; reliability; operating efficiency; financial discipline; exceptional customer care; and safety.WEC Energy Group's capital investment plan for efficiency, sustainability and growth, referred to as its ESG Progress Plan, provides a roadmap to achieve this goal. It is an aggressive plan to cut emissions, maintain superior reliability, deliver significant savings for customers, and growWEC Energy Group's and our investment in the future of energy. Throughout its strategic planning process,WEC Energy Group takes into account important developments, risks and opportunities, including new technologies, customer preferences and affordability, energy resiliency efforts, and sustainability.WEC Energy Group published the results of a priority sustainability issue assessment in 2020, identifying the issues that are most important to the company and its stakeholders over the short and long terms. This risk and priority assessment has formedWEC Energy Group's direction as a company. Creating a Sustainable FutureWEC Energy Group's ESG Progress Plan includes the retirement of older, fossil-fueled generation, to be replaced with zero-carbon-emitting renewables and clean natural gas-fired generation at its electric utilities, including us. When taken together, the retirements and new investments should better balance supply with demand, while maintaining reliable, affordable energy for our customers. The retirements will contribute to meetingWEC Energy Group's and our goals to reduce CO2 emissions from electric generation. InMay 2021 ,WEC Energy Group announced goals to achieve reductions in carbon emissions from its electric generation fleet by 60% by the end of 2025 and by 80% by the end of 2030, both from a 2005 baseline.WEC Energy Group expects to achieve these goals by making operating refinements, retiring less efficient generating units, and executing its capital plan. Over the longer term, the target for its generation fleet is net-zero CO2 emissions by 2050. As part of our path toward these goals, we are exploring co-firing with natural gas at our ERGS coal-fired units. By the end of 2030,WEC Energy Group expects to use coal as a backup fuel only, andWEC Energy Group believes it will be in a position to eliminate coal as an energy source by the end of 2035.WEC Energy Group already has retired more than 1,800 MWs of coal-fired generation since the beginning of 2018, which included the 2019 retirement of the PIPP as well as the 2018 retirement of thePleasant Prairie power plant. See Note 6, Regulatory Assets and Liabilities, for more information related to these power plant retirements. Through the ESG Progress Plan,WEC Energy Group expects to retire approximately 1,600 MW of additional fossil-fueled generation by the end of 2026, which includes the planned retirement in 2024-2025 of OCPP Units 5-8. See Note 7, Property, Plant, and Equipment, for more information related to the planned OCPP retirements. In addition to retiring these older, fossil-fueled plants,WEC Energy Group expects to invest approximately$5.4 billion from 2023-2027 in regulated renewable energy inWisconsin .WEC Energy Group's plan is to replace a portion of the retired capacity by building and owning zero-carbon-emitting renewable generation facilities that are anticipated to include the following new investments made by either us or WPS based on specific customer needs: •1,900 MW of utility-scale solar; •700 MW of battery storage; and 2022 Form 10-K 32 Wisconsin Electric Power Company -------------------------------------------------------------------------------- Table of Contents •700 MW of wind.
•100 MW of RICE natural gas-fueled generation; and
•the planned purchase of 200 MW of capacity in West Riverside - a combined-cycle
natural gas plant recently completed by Alliant Energy in
For more details, see Liquidity and Capital Resources - Cash Requirements - Significant Capital Projects.
InDecember 2018 , we received approval from the PSCW for two renewable energy pilot programs. The Solar Now pilot is expected to add a total of 35 MW of solar generation to our portfolio, allowing non-profit and government entities, as well as commercial and industrial customers, to site utility owned solar arrays on their property. Under this program, we have energized 24 Solar Now projects and currently have another five under construction, together totaling more than 30 MW. The second program, the DRER pilot, would allow large commercial and industrial customers to access renewable resources that we would operate, adding up to 150 MW of renewables to our portfolio. The DRER pilot would help these larger customers to meet their sustainability and renewable energy goals. InAugust 2021 , the PSCW approved pilot programs for us to install and maintain EV charging equipment for customers at their homes or businesses. The programs provide direct benefits to customers by removing cost barriers associated with installing EV equipment. InOctober 2021 , subject to the receipt of any necessary regulatory approvals,WEC Energy Group pledged to expand the EV charging network within its utilities' electric service territories. In doing so,WEC Energy Group joined a coalition of utility companies in a unified effort to make EV charging convenient and widely available throughout the Midwest. The coalitionWEC Energy Group joined is planning to help build and grow EV charging corridors, enabling the general public to safely and efficiently charge their vehicles.WEC Energy Group also continues to reduce methane emissions by improving its natural gas distribution system, and has set a target across its natural gas distribution operations to achieve net-zero methane emissions by the end of 2030.WEC Energy Group plans to achieve its net-zero goal through an effort that includes both continuous operational improvements and equipment upgrades, as well as the use of RNG throughout its utility systems. In 2022, we received approval from the PSCW for an RNG pilot associated with our natural gas distribution system. In 2023,WEC Energy Group is planning a pilot program with EPRI and CMBlu Energy, aGermany -based designer and manufacturer, to test a new form of long-duration energy storage on theU.S. electric grid. The program will test battery system performance, including the ability to store and discharge energy for up to twice as long as the typical lithium-ion batteries in use today. The pilot is planned for the fourth-quarter of 2023.
Reliability
We have made significant reliability-related investments in recent years, and in accordance with the ESG Progress Plan, expect to continue strengthening and modernizing our generation fleet, as well as our electric and natural gas distribution networks to further improve reliability.
We received approval to construct an LNG facility to meet anticipated peak demand. Commercial operation of the LNG facility is targeted for the end of 2023.
For more details, see Liquidity and Capital Resources - Cash Requirements - Significant Capital Projects.
Operating Efficiency
We continually look for ways to optimize the operating efficiency of our company and will continue to do so under the ESG Progress Plan. For example, we are making progress on our AMI program, replacing aging meter-reading equipment on both our network and customer property. An integrated system of smart meters, communication networks, and data management programs enables two-way communication between us and our customers. This program reduces the manual effort for disconnects and reconnects and enhances outage management capabilities. 2022 Form 10-K 33 Wisconsin Electric Power Company
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Financial Discipline
A strong adherence to financial discipline is essential to meeting our earnings projections and maintaining a strong balance sheet, stable cash flows, and quality credit ratings.
We follow an asset management strategy that focuses on investing in and acquiring assets consistent with our strategic plans, as well as disposing of assets, including property, plants, and equipment, that are no longer strategic to operations, are not performing as intended, or have an unacceptable risk profile. See Note 2, Acquisition, for more information on our recent acquisition ofWhitewater . Exceptional Customer Care Our approach is driven by an intense focus on delivering exceptional customer care every day. We strive to provide the best value for our customers by demonstrating personal responsibility for results, leveraging our capabilities and expertise, and using creative solutions to meet or exceed our customers' expectations. A multiyear effort is driving a standardized, seamless approach to digital customer service across all of theWEC Energy Group companies. It has moved all utilities, including us, to a common platform for all customer-facing self-service options. Using common systems and processes reduces costs, provides greater flexibility and enhances the consistent delivery of exceptional service to customers. Safety Safety is one of our core values and a critical component of our culture. We are committed to keeping our employees and the public safe through a comprehensive corporate safety program that focuses on employee engagement and elimination of at-risk behaviors. Under our "Target Zero" mission, we have an ultimate goal of zero incidents, accidents, and injuries. Management and union leadership work together to reinforce the Target Zero culture. We set annual goals for safety results as well as measurable leading indicators, in order to raise awareness of at-risk behaviors and situations and guide injury-prevention activities. All employees are encouraged to report unsafe conditions or incidents that could have led to an injury. Injuries and tasks with high levels of risk are assessed, and findings and best practices are shared across theWEC Energy Group companies. Our corporate safety program provides a forum for addressing employee concerns, training employees and contractors on current safety standards, and recognizing those who demonstrate a safety focus. RESULTS OF OPERATIONS The following discussion and analysis of our Results of Operations includes comparisons of our results for the year endedDecember 31, 2022 with the year endedDecember 31, 2021 . For a similar discussion that compares our results for the year endedDecember 31, 2021 with the year endedDecember 31, 2020 , see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations in Part II of our 2021 Annual Report on Form 10-K, which was filed with theSEC onFebruary 24, 2022 .
Consolidated Earnings
Our earnings for the year ended
2022 Form 10-K 34
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Table of Contents Non-GAAP Financial Measures The discussion below addresses the contribution of our utility segment to net income attributed to common shareholder. The discussion includes financial information prepared in accordance with GAAP, as well as electric margins and natural gas margins, which are not measures of financial performance under GAAP. Electric margins (electric revenues less fuel and purchased power costs) and natural gas margins (natural gas revenues less cost of natural gas sold) are non-GAAP financial measures because they exclude other operation and maintenance expense, depreciation and amortization, and property and revenue taxes. We believe that electric and natural gas margins provide a useful basis for evaluating utility operations since the majority of prudently incurred fuel and purchased power costs, as well as prudently incurred natural gas costs, are passed through to customers in current rates. As a result, management uses electric and natural gas margins internally when assessing the operating performance of our utility segment as these measures exclude the majority of revenue fluctuations caused by changes in these expenses. Similarly, the presentation of electric and natural gas margins herein is intended to provide supplemental information for investors regarding our operating performance. Our electric margins and natural gas margins may not be comparable to similar measures presented by other companies. Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance. Our utility segment operating income for the years endedDecember 31, 2022 and 2021 was$940.0 million and$868.7 million , respectively. The discussion below includes a table that provides the calculation of electric margins and natural gas margins, along with a reconciliation to the most directly comparable GAAP measure, operating income.
Utility Segment Contribution to Net Income Attributed to Common Shareholder
Year Ended December 31
(in millions) 2022 2021 B (W)
Electric revenues $ 3,461.8 $ 3,188.6 $ 273.2
Fuel and purchased power 1,274.0 1,034.5 (239.5)
Total electric margins 2,187.8 2,154.1 33.7
Natural gas revenues 608.5 475.9 132.6
Cost of natural gas sold 419.3 306.6 (112.7)
Total natural gas margins 189.2 169.3
19.9
Total electric and natural gas margins 2,377.0 2,323.4
53.6
Other operation and maintenance 831.7 898.4 66.7 Depreciation and amortization 479.7 457.9 (21.8) Property and revenue taxes 125.6 98.4 (27.2) Operating income 940.0 868.7 71.3 Other income, net 49.4 32.1 17.3 Interest expense 458.4 460.3 1.9 Income before income taxes 531.0 440.5 90.5 Income tax expense 133.1 58.1 (75.0) Preferred stock dividends of subsidiary 1.2 1.2
-
Net income attributed to common shareholder
$ 15.5 2022 Form 10-K 35 Wisconsin Electric Power Company
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The following table shows a breakdown of other operation and maintenance:
Year Ended December 31
(in millions) 2022 2021 B (W)
Operation and maintenance not included in line
items below $ 357.7 $ 366.3 $ 8.6
Transmission (1) 275.8 337.8 62.0
We Power (2) 108.1 114.9 6.8
Regulatory amortizations and other pass through
expenses (3) 69.7 67.1 (2.6)
Earnings sharing mechanism (4) - 1.7 1.7
Other 20.4 10.6 (9.8)
Total other operation and maintenance $ 831.7 $ 898.4 $ 66.7
(1) Represents transmission expense that we are authorized to collect in rates.
The PSCW has approved escrow accounting for ATC and MISO network transmission
expenses. As a result, we defer as a regulatory asset or liability, the
difference between actual transmission costs and those included in rates until
recovery or refund is authorized in a future rate proceeding. During 2022 and
2021, $340.0 million and $335.1 million , respectively, of costs were billed to
us by transmission providers.
During 2022, we amortized $62.0 million of the regulatory liabilities associated
with our transmission escrows to offset certain 2022 revenue deficiencies, as
approved by the PSCW in order to forego filing for 2022 base rate increases.
This amortization drove the decrease in transmission expense during 2022,
compared with 2021.
(2) Represents costs associated with the We Power generation units, including
operating and maintenance costs we recognized. During 2022 and 2021,
$121.7 million and $113.1 million , respectively, of costs were billed to or
incurred by us related to the We Power generation units, with the difference in
costs billed or incurred and expenses recognized, either deferred or deducted
from the regulatory asset.
(3) Regulatory amortizations and other pass through expenses are substantially offset in margins and therefore do not have a significant impact on net income.
(4) Represents operation and maintenance associated with the earnings sharing mechanism we have in place. See Note 23, Regulatory Environment, for more information about our earnings sharing mechanism.
The following tables provide information on delivered sales volumes by customer
class and weather statistics:
Year Ended December 31
MWh (in thousands)
Electric Sales Volumes 2022 2021 B (W)
Customer class
Residential 8,099.8 8,198.1 (98.3)
Small commercial and industrial 8,655.9 8,595.9 60.0
Large commercial and industrial 6,655.9 6,656.6 (0.7)
Other 110.2 118.5 (8.3)
Total retail 23,521.8 23,569.1 (47.3)
Wholesale 857.5 1,135.6 (278.1)
Resale 3,618.7 4,619.9 (1,001.2)
Total sales in MWh 27,998.0 29,324.6 (1,326.6)
Year Ended December 31
Therms (in millions)
Natural Gas Sales Volumes 2022 2021 B (W)
Customer class
Residential 400.1 351.3 48.8
Commercial and industrial 224.9 192.2 32.7
Total retail 625.0 543.5 81.5
Transportation 324.2 305.4 18.8
Total sales in therms 949.2 848.9 100.3
2022 Form 10-K 36 Wisconsin Electric Power Company
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Year Ended December 31
Degree Days
Weather (1) 2022 2021 B (W)
Heating (6,518 Normal) 6,369 5,735 11.1 %
Cooling (774 Normal) 944 1,061 (11.0) %
(1) Normal degree days are based on a 20-year moving average of monthly
temperatures from
Electric Revenues
Electric revenues increased$273.2 million during 2022, compared with 2021. To the extent that changes in fuel and purchased power costs are passed through to customers, the changes are offset by comparable changes in revenues. See the discussion of electric utility margins below for more information related to the recovery of fuel and purchased power costs and the remaining drivers of the changes in electric revenues.
Electric Utility Margins
Electric utility margins increased
•A$64.8 million increase in margins related to the impact of unprotected excess deferred taxes during 2021, which we agreed to return to customers in our PSCW-approved rate order. This increase in margins is offset in income taxes. See Note 15, Income Taxes, and Note 23, Regulatory Environment, for more information.
•A
•A$3.5 million increase in securitization revenues received during 2022, compared with 2021, related to an environmental control charge from our retail electric distribution customers on behalf ofWEPCo Environmental Trust . We began assessing this charge inJune 2021 , subsequent to the issuance of the ETBs byWEPCo Environmental Trust inMay 2021 , in accordance with aNovember 2020 PSCW financing order. See Note 13, Long-Term Debt, and Note 20, Variable Interest Entities, for more information. These revenues are offset in depreciation and amortization as well as interest expense.
These increases in margins were partially offset by:
•A$17.1 million year-over-year negative impact from collections of fuel and purchased power costs compared with costs collected in rates. Under theWisconsin fuel rules, our margins are impacted by under- or over-collections of certain fuel and purchased power costs that are within a 2% price variance from the costs included in rates, and the remaining variance beyond the 2% price variance is generally deferred for future recovery or refund to customers.
•Lower margins of
•A$12.3 million net decrease in margins related to lower sales volumes, driven by the impact of cooler weather during the 2022 cooling season, compared with 2021, and partially offset by the continued economic recovery inWisconsin from the COVID-19 pandemic. As measured by cooling degree days, 2022 was 11.0% cooler than 2021. Natural Gas Revenues Natural gas revenues increased$132.6 million during 2022, compared with 2021. Because prudently incurred natural gas costs are passed through to our customers in current rates, the changes are offset by comparable changes in revenues. The average per-unit cost of natural gas increased approximately 21% during 2022, compared with 2021. The remaining drivers of changes in natural gas revenues are described in the discussion of natural gas utility margins below.
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Table of Contents Natural Gas Utility Margins Natural gas utility margins increased$19.9 million during 2022, compared with 2021. The most significant factor impacting the higher natural gas utility margins was an increase from higher sales volumes, driven by the continued economic recovery inWisconsin from the COVID-19 pandemic, as well as colder weather during the 2022 heating season, compared with 2021. As measured by heating degree days, 2022 was 11.1% colder than 2021.
Other Operating Expenses (includes other operation and maintenance, depreciation and amortization, and property and revenue taxes)
Other operating expenses at the utility segment decreased
•A$62.0 million decrease in transmission expense driven by the amortization of a certain portion of our regulatory liability associated with our transmission escrow balance, as discussed in the notes under the other operation and maintenance table above. •A$6.8 million decrease in other operation and maintenance expense related to theWe Power leases, as discussed in the notes under the other operation and maintenance table above.
•A
•A$4.6 million decrease in other operating and maintenance expense related to our power plants, driven by increases to certain plant-related regulatory assets resulting from decisions included in ourDecember 2022 Wisconsin rate order. This decrease in expense was partially offset by increased maintenance at our plants and reductions in refined coal credits during 2022, compared with 2021.
These decreases in other operating expenses were partially offset by:
•A
•A$21.8 million increase in depreciation and amortization, driven by assets being placed into service as we continue to execute on our capital plan and an increase related to theWe Power leases. In addition, a portion of the increase is related to securitization amortization, which is offset in revenues. •A$13.8 million increase in electric and natural gas distribution expenses, primarily driven by higher costs to manage system reliability and for overall maintenance of our distribution system during 2022.
Other Income, Net
Other income, net increased$17.3 million during 2022, compared with 2021, driven by higher net credits from the non-service components of our net periodic pension and OPEB costs. See Note 18, Employee Benefits, for more information on our benefit costs. Higher AFUDC-Equity due to continued capital investment also contributed to the increase in other income, net.
Interest Expense
Interest expense decreased$1.9 million during 2022, compared with 2021, driven by lower interest expense on finance lease liabilities, primarily related to theWe Power leases, as finance lease liabilities decrease each year as payments are made. Also contributing to the decrease was AFUDC-Debt due to continued capital investment. The decrease was partially offset by a long-term debt issuance inSeptember 2022 and higher short-term debt interest rates. See Note 13, Long-Term Debt, for more information on the debt issuance.
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Table of Contents Income Tax Expense Income tax expense increased$75.0 million during 2022, compared with 2021. The increase was primarily due to an approximate$65 million negative impact related to the year-over-year amortization of the unprotected excess deferred tax benefits from the Tax Legislation in connection with the rate order approved by the PSCW, effectiveJanuary 1, 2020 . The impact due to the benefit from the amortization of these unprotected excess deferred tax benefits in 2021 did not impact earnings as there was an offsetting impact in operating income. Also contributing to the increase was higher pre-tax income in 2022. See Note 15, Income Taxes, for more information. LIQUIDITY AND CAPITAL RESOURCES
Overview
We expect to maintain adequate liquidity to meet our cash requirements for operation of our business and implementation of our corporate strategy through internal generation of cash from operations and access to the capital markets.
The following discussion and analysis of our Liquidity and Capital Resources includes comparisons of our cash flows for the year endedDecember 31, 2022 with the year endedDecember 31, 2021 . For a similar discussion that compares our cash flows for the year endedDecember 31, 2021 with the year endedDecember 31, 2020 , see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources in Part II of our 2021 Annual Report on Form 10-K, which was filed with theSEC onFebruary 24, 2022 . Cash Flows The following table summarizes our cash flows during the years endedDecember 31 : (in millions) 2022 2021 Change in 2022 Over 2021 Cash provided by (used in): Operating activities$ 637.0 $ 802.2 $ (165.2) Investing activities (914.0) (798.0) (116.0) Financing activities 321.7 (8.4) 330.1 Operating Activities
Net cash provided by operating activities decreased
•A$284.5 million decrease in cash from higher payments for fuel and purchased power at our plants during 2022, compared with 2021. Our plants incurred higher fuel costs during 2022 as a result of an increase in the price of natural gas. •A$92.4 million decrease in cash from higher payments for other operation and maintenance expenses. During 2022, our payments were higher for managing system reliability, overall maintenance of our distribution system, transmission, andWe Power costs, as well as due to the timing of payments for accounts payable.
•A
These decreases in net cash provided by operating activities were partially
offset by a
2022 Form 10-K 39
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Net cash used in investing activities increased
•A
•A
•Proceeds of
These increases in net cash used in investing activities were partially offset by insurance proceeds of$41.0 million received during 2022 for property damage, primarily related to the PSB water damage claim. See Note 7, Property, Plant, and Equipment, for more information.
Capital Expenditures
Capital expenditures for the years ended
(in millions) 2022 2021 Change in 2022 Over 2021 Capital expenditures$ 930.4 $ 813.3 $ 117.1 The increase in cash paid for capital expenditures during 2022, compared with 2021, was primarily driven by higher payments for capital expenditures related toParis , Badger Hollow II, and the new natural gas-fired generation being constructed at WPS's existingWeston power plant. These increases were partially offset by lower payments for capital expenditures related to the restoration of our PSB and upgrades to our natural gas distribution system. See Note 7, Property, Plant, and Equipment, for more information on the PSB.
See Liquidity and Capital Resources - Cash Requirements - Significant Capital Projects below for more information.
Financing Activities
Net cash related to financing activities increased
•A
•A
•An
These increases in cash related to financing activities were partially offset by a$270.0 million decrease in cash due to higher dividends paid to our parent during 2022, compared with 2021, to balance our capital structure.
Significant Financing Activities
For more information on our financing activities, see Note 12, Short-Term Debt and Lines of Credit, and Note 13, Long-Term Debt.
Cash Requirements
We require funds to support and grow our business. Our significant cash requirements primarily consist of capital and investment expenditures, payments to retire and pay interest on long-term debt, the payment of common stock dividends to our parent, and the funding of our ongoing operations. Our significant cash requirements are discussed in further detail below.
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Table of Contents Significant Capital Projects We have several capital projects that will require significant capital expenditures over the next three years and beyond. All projected capital requirements are subject to periodic review and may vary significantly from estimates, depending on a number of factors. These factors include environmental requirements, regulatory restraints and requirements, changes in tax laws and regulations, acquisition and development opportunities, market volatility, economic trends, supply chain disruptions, inflation, and interest rates. Our estimated capital expenditures and acquisitions for the next three years are reflected below. These amounts include anticipated expenditures for environmental compliance and certain remediation issues. For a discussion of certain environmental matters affecting us, see Note 21, Commitments and Contingencies. (in millions) 2023$ 1,504.1 2024 1,478.2 2025 1,274.6 Total$ 4,256.9 We continue to upgrade our electric and natural gas distribution systems to enhance reliability. These upgrades include addressing our aging infrastructure and system hardening and the AMI program. AMI is an integrated system of smart meters, communication networks, and data management systems that enable two-way communication between utilities and customers.
•We have partnered with an unaffiliated utility to construct a utility-scale solar project, Badger Hollow II, that will be located inIowa County, Wisconsin . Once constructed, we will own 100 MW of this project. Our share of the cost of this project is estimated to be approximately$151 million . Commercial operation of Badger Hollow II is targeted for 2023. •We, along with WPS and an unaffiliated utility, received PSCW approval to acquire and constructParis , a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located inKenosha County, Wisconsin and once fully constructed, we will own 150 MW of solar generation and 82 MW of battery storage of this project. Our share of the cost of this project is estimated to be approximately$325 million , with construction of the solar portion expected to be completed in 2023. •We, along with WPS and an unaffiliated utility, received PSCW approval to acquire and construct Darien, a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located inRock andWalworth counties,Wisconsin and once fully constructed, we will own 188 MW of solar generation and 56 MW of battery storage of this project. Our share of the cost of this project is estimated to be approximately$335 million , with construction of the solar portion expected to be completed in 2024. •InApril 2021 , we, along with WPS and an unaffiliated utility, filed an application with the PSCW for approval to acquire theKoshkonong Solar-Battery Park , a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located inDane County, Wisconsin and once fully constructed, we will own 225 MW of solar generation and 124 MW of battery storage of this project. If approved, our share of the cost of this project is estimated to be approximately$488 million , with construction of the solar portion expected to be completed in 2025. •We, along with WPS, received PSCW approval to construct a natural gas-fired generation facility at WPS's existingWeston power plant site in northernWisconsin . The new facility will consist of seven RICE units. Once constructed, we will own 64 MW of this project. Our share of the cost of this project is estimated to be approximately$85 million , with construction expected to be completed in 2023. •EffectiveJanuary 1, 2023 , we, along with WPS, completed the acquisition ofWhitewater , a commercially operational 236.5 MW dual fueled (natural gas and low sulfur fuel oil) combined cycle electrical generation facility inWhitewater, Wisconsin . Our share of the cost of this facility was approximately$37.5 million for 50% of the capacity, which includes transaction costs and working capital. See Note 14, Leases, for more information. •InJanuary 2022 , WPS, along with an unaffiliated utility, filed an application with the PSCW for approval to acquire a portion of West Riverside's nameplate capacity. WPS is also requesting approval to assign the option to purchase part of West Riverside to 2022 Form 10-K 41 Wisconsin Electric Power Company
-------------------------------------------------------------------------------- Table of Contents us. If approved, we or WPS would acquire 100 MW of capacity, in the first of two potential option exercises. West Riverside is a combined cycle natural gas plant recently completed by an unaffiliated utility inRock County, Wisconsin . If approved, and WPS assigns the option to us, our share of the cost of this ownership interest would be approximately$91 million , with the transaction expected to close in the second quarter of 2023. In addition, WPS could exercise and request approval to assign to us a second option to acquire an additional 100 MW of capacity. If approved, and WPS assigns the option to us, our share of the cost of this ownership interest is expected to be approximately$90 million , with the transaction expected to close in 2024. InMarch 2022 , the DOC opened an investigation into whether new tariffs should be imposed on solar panels and cells imported from multiple southeast Asian countries. See Factors Affecting Results, Liquidity, and Capital Resources - Regulatory, Legislative, and Legal Matters -United States Department of Commerce Complaints and Factors Affecting Results , Liquidity, and Capital Resources - Regulatory, Legislative, and Legal Matters - Uyghur Forced Labor Prevention Act for information on the potential impacts to our solar projects as a result of the DOC investigation and CBP actions related to solar panels, respectively. The expected in-service dates identified above already reflect some of these impacts. We have received approval to construct an LNG facility. The facility would provide us with approximately one Bcf of natural gas supply to meet anticipated peak demand without requiring the construction of additional interstate pipeline capacity. The facility is expected to reduce the likelihood of constraints on our natural gas system during the highest demand days of winter. The project is estimated to cost approximately$185 million . Commercial operation of the LNG facility is targeted for the end of 2023.
Long-Term Debt
A significant amount of cash is required to retire and pay interest on our long-term debt obligations. See Note 13, Long-Term Debt, for more information on our outstanding long-term debt, including a schedule of our long-term debt maturities over the next five years. The following table summarizes our required interest payments on long-term debt (excluding finance lease obligations) as ofDecember 31, 2022 :
Interest Payments Due by Period
Less Than More Than
(in millions) Total 1 Year 1-3 Years 3-5 Years 5 Years
Interest payments on long-term
debt $ 2,276.6 $ 140.4 $ 269.3 $ 251.9 $ 1,615.0
Common Stock Dividends
During the years ended December 31, 2022 , 2021, and 2020, we paid common stock
dividends of $630.0 million , $360.0 million , and $395.0 million , respectively,
to the sole holder of our common stock, WEC Energy Group . Any payment of future
dividends is subject to approval by our Board of Directors and is dependent upon
future earnings, capital requirements, and financial and other business
conditions. In addition, various financing arrangements and regulatory
requirements impose certain restrictions on our ability to transfer funds to WEC
Energy Group in the form of cash dividends, loans, or advances. We do not
believe that these restrictions will materially affect our operations or limit
any dividend payments in the foreseeable future. See Note 10, Common Equity, for
more information related to these restrictions and our other common stock
matters.
Other Significant Cash Requirements
Our utility operations have purchase obligations under various contracts for the procurement of fuel, power, and gas supply, as well as the related storage and transportation. These costs are a significant component of funding our ongoing operations. See Note 21, Commitments and Contingencies, for more information, including our minimum future commitments related to these purchase obligations. 2022 Form 10-K 42 Wisconsin Electric Power Company
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In addition to our energy-related purchase obligations, we have commitments for
other costs incurred in the normal course of business, including costs related
to information technology services, meter reading services, maintenance and
other service agreements for certain generating facilities, and various
engineering agreements. Our estimated future cash requirements related to these
purchase obligations are reflected below.
Payments Due by Period
(in millions) Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years
Purchase orders
55.3 $ 38.8 $ 16.5 $ 0.1
We have various finance and operating lease obligations. Our finance lease
obligations primarily relate to power purchase commitments and land leases for
Badger Hollow II. Our operating lease obligations are for office space and land.
See Note 14, Leases, for more information, including an analysis of our minimum
lease payments due in future years.
We make contributions to our pension and OPEB plans based upon various factors
affecting us, including our liquidity position and tax law changes. See Note 18,
Employee Benefits, for our expected contributions in 2023 and our expected
pension and OPEB payments for the next 10 years. We expect the majority of these
future pension and OPEB payments to be paid from our outside trusts. See Sources
of Cash-Investments in Outside Trusts below for more information.
In addition to the above, our balance sheet at December 31, 2022 included
various other liabilities that, due to the nature of the liabilities, the amount
and timing of future payments cannot be determined with certainty. These
liabilities include AROs, liabilities for the remediation of manufactured gas
plant sites, and liabilities related to the accounting treatment for uncertainty
in income taxes. For additional information on these liabilities, see Note 9,
Asset Retirement Obligations, Note 21, Commitments and Contingencies, and
Note 15, Income Taxes, respectively.
Off-Balance Sheet Arrangements
We are a party to various financial instruments with off-balance sheet risk as a part of our normal course of business, including letters of credit that primarily support our commodity contracts. We believe that these agreements do not have, and are not reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. See Note 1(q), Guarantees, Note 12, Short-Term Debt and Lines of Credit, and Note 20, Variable Interest Entities, for more information.
Sources of Cash
Liquidity
We anticipate meeting our short-term and long-term cash requirements to operate our business and implement our corporate strategy through internal generation of cash from operations, equity contributions from our parent, and access to the capital markets, which allows us to obtain external short-term borrowings, including commercial paper, and intermediate or long-term debt securities. Cash generated from operations is primarily driven by sales of electricity and natural gas to our utility customers, reduced by costs of operations. Our access to the capital markets is critical to our overall strategic plan and allows us to supplement cash flows from operations with external borrowings to manage seasonal variations, working capital needs, commodity price fluctuations, unplanned expenses, and unanticipated events. We maintain a bank back-up credit facility, which provides liquidity support for our obligations with respect to commercial paper and for general corporate purposes. We review our bank back-up credit facility needs on an ongoing basis and expect to be able to maintain adequate credit facilities to support our operations. The amount, type, and timing of any financings in 2023, as well as in subsequent years, will be contingent on investment opportunities and our cash requirements and will depend upon prevailing market conditions, regulatory approvals, and other factors. We plan to maintain a capital structure consistent with that approved by the PSCW. For more information on our approved capital structure, see Item 1. Business - C. Regulation.
The issuance of our securities is subject to the approval of the PSCW.
Additionally, with respect to the public offering of securities, we file
registration statements with the
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Table of Contents authorized by the PSCW, as well as the securities registered under the 1933 Act, are closely monitored and appropriate filings are made to ensure flexibility in the capital markets. AtDecember 31, 2022 , our current liabilities exceeded our current assets by$165.0 million . We do not expect this to have any impact on our liquidity as we currently believe that our cash and cash equivalents, our available capacity under our existing revolving credit facility, cash generated from ongoing operations, and access to the capital markets are adequate to meet our short-term and long-term cash requirements.
See Note 12, Short-Term Debt and Lines of Credit, and Note 13, Long-Term Debt, for more information about our credit facility and securities.
Investments in Outside Trusts
We maintain investments in outside trusts to fund the obligation to provide pension and certain OPEB benefits to current and future retirees. As ofDecember 31, 2022 , these trusts had investments of approximately$1.2 billion , consisting of fixed income and equity securities, that are subject to the volatility of the stock market and interest rates. The performance of existing plan assets, long-term discount rates, changes in assumptions, and other factors could affect our future contributions to the plans, our financial position if our accumulated benefit obligation exceeds the fair value of the plan assets, and future results of operations related to changes in pension and OPEB expense and the assumed rate of return. For additional information, see Note 18, Employee Benefits.
Debt Covenants
Certain of our short-term debt agreements contain financial covenants that we must satisfy, including debt to capitalization ratios. AtDecember 31, 2022 , we were in compliance with all such covenants. We expect to be in compliance with all such debt covenants for the foreseeable future. See Note 12, Short-Term Debt and Lines of Credit, Note 13, Long-Term Debt, and Note 10, Common Equity, for more information. Credit Rating Risk Cash collateral postings and prepayments made with external parties, including postings related to exchange-traded contracts, and cash collateral posted by external parties were immaterial as ofDecember 31, 2022 . From time to time, we may enter into commodity contracts that could require collateral or a termination payment in the event of a credit rating change to below BBB- atS&P Global Ratings , a division of S&P Global Inc., and/or Baa3 atMoody's Investors Service, Inc. If we had a sub-investment grade credit rating atDecember 31, 2022 , we could have been required to post$100 million of additional collateral or other assurances pursuant to the terms of a PPA. We also have other commodity contracts that, in the event of a credit rating downgrade, could result in a reduction of our unsecured credit granted by counterparties.
In addition, access to capital markets at a reasonable cost is determined in large part by credit quality. Any credit ratings downgrade could impact our ability to access capital markets.
Subject to other factors affecting the credit markets as a whole, we believe our
current ratings should provide a significant degree of flexibility in obtaining
funds on competitive terms. However, these security ratings reflect the views of
the rating agency only. An explanation of the significance of these ratings may
be obtained from the rating agency. Such ratings are not a recommendation to
buy, sell, or hold securities. Any rating can be revised upward or downward or
withdrawn at any time by a rating agency.
FACTORS AFFECTING RESULTS, LIQUIDITY, AND CAPITAL RESOURCESCompetitive Markets
Electric Utility Industry
TheFERC supports large RTOs, which directly impacts the structure of the wholesale electric market. Due to theFERC's support of RTOs, MISO uses the MISO Energy Markets to carry out its operations, including the use of LMP to value electric transmission congestion and losses. Increased competition in the retail and wholesale markets, which may result from restructuring efforts, could have a significant and adverse financial impact on us. 2022 Form 10-K 44 Wisconsin Electric Power Company -------------------------------------------------------------------------------- Electric utility revenues inWisconsin are regulated by the PSCW. The PSCW continues to maintain the position that the question of whether to implement electric retail competition inWisconsin should ultimately be decided by theWisconsin legislature. No such legislation has been introduced inWisconsin to date, and it is uncertain when, if at all, retail choice might be implemented inWisconsin . Natural Gas Utility Industry We offer both natural gas transportation service and interruptible natural gas sales to enable customers to better manage their energy costs. Customers continue to switch between firm system supply, interruptible system supply, and transportation service each year as the economics and service options change. Due to the PSCW's previous proceedings on natural gas industry regulation in a competitive environment, the PSCW currently provides allWisconsin customer classes with competitive markets the option to choose a third-party natural gas supplier. All of ourWisconsin non-residential customer classes have competitive market choices and, therefore, can purchase natural gas directly from either a third-party supplier or us. Since third-party suppliers can be used inWisconsin , the PSCW has also adopted standards for transactions between a utility and its natural gas marketing affiliates. We offer natural gas transportation services to our customers that elect to purchase natural gas directly from a third-party supplier. Since these transportation customers continue to use our distribution systems to transport natural gas to their facilities, we earn distribution revenues from them. As such, the loss of revenue associated with the cost of natural gas that our transportation customers purchase from third-party suppliers has little impact on our net income, as it is substantially offset by an equal reduction to natural gas costs.
We are currently unable to predict the impact, if any, of potential future industry restructuring on our results of operations or financial position.
Regulatory, Legislative, and Legal Matters
Regulatory Recovery
We account for our regulated operations in accordance with accounting guidance under the Regulated Operations Topic of the FASB ASC. Our rates are determined by the PSCW and theFERC . See Item 1. Business - C. Regulation for more information on these commissions. See Note 23, Regulatory Environment, for additional information regarding recent rate proceedings and orders. Regulated entities are allowed to defer certain costs that would otherwise be charged to expense if the regulated entity believes the recovery of those costs is probable. We record regulatory assets pursuant to generic and/or specific orders issued by our regulators. Recovery of the deferred costs in future rates is subject to the review and approval by our regulators. We assume the risks and benefits of ultimate recovery of these items in future rates. If the recovery of the deferred costs is not approved by our regulators, the costs would be charged to income in the current period. Regulators can impose liabilities on a prospective basis for amounts previously collected from customers and for amounts that are expected to be refunded to customers. We record these items as regulatory liabilities. See Note 6, Regulatory Assets and Liabilities, for more information on our regulatory assets and liabilities.
Petitions Before PSCW Regarding Third-Party Financed Distributed Energy Resources
InMay 2022 , two petitions were filed with the PSCW requesting a declaratory ruling that the owner of a third-party financed DER is not a "public utility" as defined underWisconsin law and, therefore, is not subject to the PSCW's jurisdiction under any statute or rule regulating public utilities. The parties that filed the petitions provide financing to their customers for installation of DERs (including solar panels and energy storage) on the customer's property. A DER is connected to the host customer's utility meter and is used for the customer's energy needs. It may also be connected to the grid for distribution. InJuly 2022 , the PSCW found that the specific facts and circumstances merited the opening of a docket for each petition to consider whether to grant all or part of the requested declaratory ruling. OnDecember 1, 2022 , the PSCW granted one petitioner's request for a declaratory ruling, finding that the owner of the third-party financed DER at issue in the petitioner's brief is not a public utility underWisconsin law. The ruling was limited to the specific facts 2022 Form 10-K 45 Wisconsin Electric Power Company -------------------------------------------------------------------------------- and circumstances of the lease presented in that petition. A second petition is also being considered. Although the finding in the first petition was limited to the specific facts and circumstances of the lease presented in that petition, similar findings or a broader policy position could adversely impact our business operations.
Uyghur Forced Labor Prevention Act
The CBP issued a WRO inJune 2021 , applicable to certain silica-based products originating from theXinjiang Uyghur Autonomous Region ofChina (Xinjiang ), such as polysilicon, included in the manufacturing of solar panels. InJune 2022 , the WRO was superseded by the implementation of the UFLPA, which was signed into law byPresident Biden inDecember 2021 . The UFLPA establishes a rebuttable presumption that any imports wholly or partially manufactured inXinjiang are prohibited from enteringthe United States . While our suppliers were able to provide the CBP sufficient documentation to meet WRO compliance requirements, and we expect the same will be true for UFLPA purposes, we cannot currently predict what, if any, impact the UFLPA will have on the overall supply of solar panels intothe United States and the related timing and cost of our solar projects included inWEC Energy Group's capital plan.
InAugust 2021 , a group of anonymous domestic solar manufacturers filed a petition (AD/CVD) with the DOC seeking to impose new tariffs on solar panels and cells imported from several countries, includingMalaysia ,Vietnam , andThailand . The petitioners claimed that Chinese solar manufacturers are shifting products to these countries to avoid the tariffs required on products imported fromChina . InNovember 2021 , the DOC rejected this petition. In denying the petition, the DOC cited the anonymous group's refusal of the DOC's request to provide more detail and identify its members due to the members' concerns about retribution from the dominant Chinese solar industry. InFebruary 2022 , aCalifornia based company filed a petition (AD/CVD) with the DOC seeking to impose new tariffs on solar panels and cells imported from multiple countries, includingMalaysia ,Vietnam ,Thailand , andCambodia . While the petition is similar to the one rejected by the DOC inNovember 2021 , there are notable differences. The group addedCambodia to the petition and requested that the DOC conduct a country-wide inquiry into each of the four countries. InMarch 2022 , the DOC decided to act on the February petition and investigate the claim. OnDecember 2, 2022 , the DOC announced its preliminary determination that certain companies are circumventing anti-dumping and countervailing duty orders on solar cells and modules fromChina . As the next step, the DOC will conduct in-person audits to verify the information that was the basis of the finding. If the DOC makes a final determination, which is currently expected in the second quarter of 2023, that such circumvention is occurring it would be able to apply any final tariffs retroactively toNovember 4, 2021 . If imposed, the new tariffs could further disrupt the supply of solar modules tothe United States , and could impact the cost and timing of our solar projects. InJune 2022 , theBiden Administration used its executive powers to issue a 24-month tariff moratorium on solar panels manufactured inCambodia ,Malaysia ,Thailand , andVietnam . The moratorium comes as a direct response to concerns raised about the adverse impact from the ongoing DOC complaint on theU.S. solar industry. As the DOC will continue its investigation discussed above, companies may still be subject to tariffs after the moratorium ends; however,U.S. companies will reportedly be exempt from any retroactive tariffs that previously could have applied.The Biden Administration also announced that it plans to invoke the Defense Production Act to accelerate the production of solar panels in theU.S. The Biden Administration's actions did not address whether WROs applied to panels under previous complaints would be affected.
InNovember 2021 ,President Biden signed into law theInfrastructure Investment and Jobs Act, which provides for approximately$1.2 trillion of federal spending over the next five years, including approximately$85 billion for investments in power, utilities, and renewables infrastructure acrossthe United States . We expect funding from this Act will support the work we are doing to reduce GHG emissions, increase EV charging, and strengthen and protect the energy grid. Funding in the Act should also help to expand emerging technologies, like hydrogen and carbon management, as we continue the transition to a clean energy future. We believe theInfrastructure Investment and Jobs Act will accelerate investment in projects that will help us meet our net zero emission goals to the benefit of our customers, the communities we serve, and our company.
2022 Form 10-K 46
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Inflation Reduction Act
InAugust 2022 ,President Biden signed into law the IRA, which provides for$258 billion in energy-related provisions over a 10-year period. The provisions of the IRA are intended to, among other things, lower gasoline and electricity prices, incentivize domestic clean energy investment, manufacturing, and production, and promote reductions in carbon emissions. We believe that we and our customers can benefit from the IRA's provisions that extend tax benefits for renewable technologies, increase or restore higher rates for PTCs, add an option to claim PTCs for solar projects, expand qualified ITC facilities to include standalone energy storage, and its provision to allow companies to transfer tax credits generated from renewable projects. The IRA also implements a 15% corporate alternative minimum tax and a 1% excise tax on stock repurchases. Although significant regulatory guidance is expected on the tax provisions in the IRA, we currently believe the provisions on alternative minimum tax and stock repurchases will not have a material impact on us. Overall, we believe the IRA will help reduce our cost of investing in projects that will support our commitment to reduce emissions and provide customers affordable, reliable, and clean energy over the longer term.
Environmental Matters
See Note 21, Commitments and Contingencies, for a discussion of certain environmental matters affecting us, including rules and regulations relating to air quality, water quality, land quality, and climate change.
Market Risks and Other Significant Risks
We are exposed to market and other significant risks as a result of the nature of our businesses and the environments in which those businesses operate. These risks, described in further detail below, include but are not limited to:
Commodity Costs
In the normal course of providing energy, we are subject to market fluctuations in the costs of coal, natural gas, purchased power, and fuel oil used in the delivery of coal. We manage our fuel and natural gas supply costs through a portfolio of short and long-term procurement contracts with various suppliers for the purchase of coal, natural gas, and fuel oil. In addition, we manage the risk of price volatility through natural gas and electric hedging programs. Embedded within our rates are amounts to recover fuel, natural gas, and purchased power costs. We have recovery mechanisms in place that allow us to recover or refund all or a portion of the changes in prudently incurred fuel, natural gas, and purchased power costs from rate case-approved amounts. See Item 1. Business - C. Regulation for more information on these mechanisms. Higher commodity costs can increase our working capital requirements, result in higher gross receipts taxes, and lead to increased energy efficiency investments by our customers to reduce utility usage and/or fuel substitution. Higher commodity costs combined with slower economic conditions also expose us to greater risks of accounts receivable write-offs as more customers are unable to pay their bills. See Note 5, Credit Losses, for more information on our mechanism that allows for cost recovery or refund of uncollectible expense.
Weather
Our utility rates are based upon estimated normal temperatures. Our electric utility margins are unfavorably sensitive to below normal temperatures during the summer cooling season and, to some extent, to above normal temperatures during the winter heating season. Our natural gas utility margins are unfavorably sensitive to above normal temperatures during the winter heating season. A summary of actual weather information in our service territory during 2022 and 2021, as measured by degree days, may be found in Results of Operations.
Interest Rates
We are exposed to interest rate risk resulting from our short-term borrowings and projected near-term debt financing needs. We manage exposure to interest rate risk by limiting the amount of our variable rate obligations and continually monitoring the effects of market changes on interest rates. When it is advantageous to do so, we enter into long-term fixed rate debt.
2022 Form 10-K 47
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Table of Contents Based on our variable rate debt outstanding atDecember 31, 2022 and 2021, a hypothetical increase in market interest rates of one percentage point would have increased annual interest expense by$4.6 million and$3.8 million in 2022 and 2021, respectively. This sensitivity analysis was performed assuming a constant level of variable rate debt during the period and an immediate increase in interest rates, with no other changes for the remainder of the period.
Marketable Securities Return
We use various trusts to fund our pension and OPEB obligations. These trusts invest in debt and equity securities. Changes in the market prices of these assets can affect future pension and OPEB expenses. Additionally, future contributions can also be affected by the investment returns on trust fund assets. The financial risks associated with investment returns are mitigated through the requirement that we implement escrow accounting treatment for pension and OPEB costs in 2023 and 2024, as required by theDecember 2022 rate order issued by the PSCW. See Note 23, Regulatory Environment, for more information on our 2023 and 2024 rates. The fair value of our trust fund assets and expected long-term returns were approximately: (in millions) As of December 31, 2022 Expected Return on Assets in 2023 Pension trust funds $ 940.7 6.75 % OPEB trust funds $ 211.3 7.00 % Fiduciary oversight of the pension and OPEB trust fund investments is the responsibility of anInvestment Trust Policy Committee . The Committee works with external actuaries and investment consultants on an ongoing basis to establish and monitor investment strategies and target asset allocations. Forecasted cash flows for plan liabilities are regularly updated based on annual valuation results. Target asset allocations are determined utilizing projected benefit payment cash flows and risk analyses of appropriate investments. The targeted asset allocations are intended to reduce risk, provide long-term financial stability for the plans, and maintain funded levels which meet long-term plan obligations while preserving sufficient liquidity for near-term benefit payments. Investment strategies utilize a wide diversification of asset types and qualified external investment managers.WEC Energy Group consults with its investment advisors on an annual basis to help it forecast expected long-term returns on plan assets by reviewing actual historical returns and calculating expected total trust returns using the weighted-average of long-term market returns for each of the major target asset categories utilized in the funds.
Economic Conditions
Our service territories are within the state of
Inflation and Supply Chain Disruptions
We continue to monitor the impact of inflation and supply chain disruptions. We monitor the costs of medical plans, fuel, transmission access, construction costs, regulatory and environmental compliance costs, and other costs in order to minimize inflationary effects in future years, to the extent possible, through pricing strategies, productivity improvements, and cost reductions. We monitor the global supply chain, and related disruptions, in order to ensure we are able to procure the necessary materials and other resources necessary to both maintain our energy services in a safe and reliable manner and to grow our infrastructure in accordance withWEC Energy Group's capital plan, which includes us. For additional information concerning risks related to inflation and supply chain disruptions, see the three risk factors below.
•Item 1A. Risk Factors - Risks Related to the Operation of Our Business - Our operations and corporate strategy may be adversely affected by supply chain disruptions and inflation.
•Item 1A. Risk Factors - Risks Related to the Operation of Our Business - We are actively involved with multiple significant capital projects, which are subject to a number of risks and uncertainties that could adversely affect project costs and completion of construction projects.
2022 Form 10-K 48
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Table of Contents •Item 1A. Risk Factors - Risks Related to Economic and Market Volatility - Fluctuating commodity prices could negatively impact our electric and natural gas utility operations. For additional information concerning risk factors, including market risks, see the Cautionary Statement Regarding Forward-Looking Information at the beginning of this report and Item 1A. Risk Factors.
Critical Accounting Policies and Estimates
The preparation of financial statements in compliance with GAAP requires the application of accounting policies, as well as the use of estimates, assumptions, and judgments that could have a material impact on our financial statements and related disclosures. Judgments regarding future events may include the likelihood of success of particular projects, legal and regulatory challenges, and anticipated recovery of costs. Actual results may differ significantly from estimated amounts based on varying assumptions. Our significant accounting policies are described in Note 1, Summary of Significant Accounting Policies. The following is a list of accounting policies and estimates that require management's most difficult, subjective, or complex judgments and may change in subsequent periods.
Regulatory Accounting
Our utility operations follow the guidance under the Regulated Operations Topic of the FASB ASC (Topic 980). Our financial statements reflect the effects of the ratemaking principles followed by the jurisdictions regulating us. Certain items that would otherwise be immediately recognized as revenues and expenses are deferred as regulatory assets and regulatory liabilities for future recovery or refund to customers, as authorized by our regulators. Future recovery of regulatory assets, including the timeliness of recovery and our ability to earn a reasonable return, is not assured and is generally subject to review by regulators in rate proceedings for matters such as prudence and reasonableness. Once approved, the regulatory assets and liabilities are amortized into earnings over the rate recovery or refund period. If recovery or refund of costs is not approved or is no longer considered probable, these regulatory assets or liabilities are recognized in current period earnings. Management regularly assesses whether these regulatory assets and liabilities are probable of future recovery or refund by considering factors such as changes in the regulatory environment, earnings from our electric and natural gas utility operations, rate orders issued by our regulators, historical decisions by our regulators regarding regulatory assets and liabilities, and the status of any pending or potential deregulation legislation. The application of the Regulated Operations Topic of the FASB ASC would be discontinued if all or a separable portion of our utility operations no longer met the criteria for application. Our regulatory assets and liabilities would be written off to income as an unusual or infrequently occurring item in the period in which discontinuation occurred. See Note 6, Regulatory Assets and Liabilities, for more information on our regulatory assets and liabilities.
Long-Lived Assets
In accordance with ASC 980-360, Regulated Operations - Property, Plant, and Equipment, we periodically assess the recoverability of certain long-lived assets when events or changes in circumstances indicate that the carrying amount of those long-lived assets may not be recoverable. Examples of events or changes in circumstances include, but are not limited to, a significant decrease in the market price, a significant change in use, a regulatory decision related to recovery of assets from customers, adverse legal factors or a change in business climate, operating or cash flow losses, or an expectation that the asset might be sold or abandoned. See Note 1(j), Asset Impairment, for our policy on accounting for abandonments. Performing an impairment evaluation involves a significant degree of estimation and judgment by management in areas such as identifying circumstances that indicate an impairment may exist, identifying and grouping affected assets, and developing the undiscounted future cash flows. An impairment loss is measured as the excess of the carrying amount of the asset in comparison to the fair value of the asset. The fair value of the asset is assessed using various methods, including internally developed discounted cash flow analysis, expected recovery of regulated assets, and analysis from outside advisors. See Note 7, Property, Plant, and Equipment for more information on our generating units probable of being retired. See Note 6, Regulatory Assets and Liabilities and Note 23, Regulatory Environment, for more information on our retired generating units, including various approvals we received from theFERC and the PSCW. 2022 Form 10-K 49 Wisconsin Electric Power Company
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Pension and Other Postretirement Employee Benefits
The costs of providing non-contributory defined pension benefits and OPEB, described in Note 18, Employee Benefits, are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience.
Pension and OPEB costs are impacted by actual employee demographics (including age, compensation levels, and employment periods), the level of contributions made to the plans, and earnings on plan assets. Pension and OPEB costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets, mortality and discount rates, and expected health care cost trends. Changes made to the plan provisions may also impact current and future pension and OPEB costs. Pension and OPEB plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity and fixed income market returns, as well as changes in general interest rates, may result in increased or decreased benefit costs in future periods. Changes in benefit costs are mitigated through the requirement that we implement escrow accounting treatment for pension and OPEB costs in 2023 and 2024, as required by theDecember 2022 rate order issued by the PSCW. See Note 23, Regulatory Environment, for more information on our 2023 and 2024 rates. The following table shows how a given change in certain actuarial assumptions would impact the projected benefit obligation and the reported net periodic pension cost (including amounts capitalized to our balance sheets). Each factor below reflects an evaluation of the change based on a change in that assumption only. Actuarial AssumptionPercentage-Point
Change in Impact on Projected Impact on 2022 (in millions, except percentages)
Assumption Benefit Obligation Pension Cost
Discount rate (0.5) $ 35.2 $ 1.9
Discount rate 0.5 (31.6) (2.1)
Rate of return on plan assets (0.5) N/A 5.3
Rate of return on plan assets 0.5 N/A (5.3)
The following table shows how a given change in certain actuarial assumptions
would impact the accumulated OPEB obligation and the reported net periodic OPEB
cost (including amounts capitalized to our balance sheets). Each factor below
reflects an evaluation of the change based on a change in that assumption only.
Impact on Impact on 2022
Actuarial Assumption Percentage-Point Change in Postretirement Postretirement
(in millions, except percentages) Assumption Benefit Obligation Benefit Cost
Discount rate (0.5) $ 7.4 $ 1.2
Discount rate 0.5 (6.6) (1.2)
Health care cost trend rate (0.5) (3.2) (1.3)
Health care cost trend rate 0.5 3.7 1.5
Rate of return on plan assets (0.5) N/A 1.3
Rate of return on plan assets 0.5 N/A (1.3)
The discount rates are selected based on hypothetical bond portfolios consisting
of noncallable, high-quality corporate bonds across the full maturity spectrum.
From the hypothetical bond portfolios, a single rate is determined that equates
the market value of the bonds purchased to the discounted value of the plans'
expected future benefit payments.
We establish our expected return on assets based on consideration of historical
and projected asset class returns, as well as the target allocations of the
benefit trust portfolios. The assumed long-term rate of return on pension plan
assets was 6.75% in 2022, 2021, and 2020. The actual rate of return on pension
plan assets, net of fees, was (11.36)%, 8.82%, and 10.72%, in 2022, 2021, and
2020, respectively.
In selecting assumed health care cost trend rates, past performance and
forecasts of health care costs are considered. For more information on health
care cost trend rates and a table showing future payments that we expect to make
for our pension and OPEB, see Note 18, Employee Benefits.
2022 Form 10-K 50
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Table of Contents Unbilled Revenues We record utility operating revenues when energy is delivered to our customers. However, the determination of energy sales to individual customers is based upon the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of their last meter reading are estimated and corresponding unbilled revenues are calculated. Unbilled revenues are estimated each month based upon actual generation and throughput volumes, recorded sales, estimated customer usage by class, weather factors, estimated line losses, and applicable customer rates. Energy demand for the unbilled period or changes in rate mix due to fluctuations in usage patterns of customer classes could impact the accuracy of the unbilled revenue estimate. Total unbilled utility revenues were$201.5 million and$184.4 million as ofDecember 31, 2022 and 2021, respectively. The changes in unbilled revenues are primarily due to changes in the costs of natural gas, weather, and customer rates.
Income Tax Expense
Significant management judgment is required in determining our provision for income taxes, deferred income tax assets and liabilities, the liability for unrecognized tax benefits, and any valuation allowance recorded against deferred income tax assets. The assumptions involved are supported by historical data, reasonable projections, and interpretations of applicable tax laws and regulations across multiple taxing jurisdictions. Significant changes in these assumptions could have a material impact on our financial condition and results of operations. See Note 1(n), Income Taxes, and Note 15, Income Taxes, for a discussion of accounting for income taxes. We are required to estimate income taxes for each of our applicable tax jurisdictions as part of the process of preparing consolidated financial statements. This process involves estimating current income tax liabilities together with assessing temporary differences resulting from differing treatment of items, such as depreciation, for income tax and accounting purposes. These differences result in deferred income tax assets and liabilities, which are included within our balance sheets. We also assess the likelihood that our deferred income tax assets will be recovered through future taxable income. To the extent we believe that realization is not likely, we establish a valuation allowance, which is offset by an adjustment to income tax expense in our income statements. Uncertainty associated with the application of tax statutes and regulations, the outcomes of tax audits and appeals, changes in income tax law, enacted tax rates or amounts subject to income tax, and changes in the regulatory treatment of any tax reform benefits requires that judgments and estimates be made in the accrual process and in the calculation of effective tax rates. Only income tax benefits that meet the "more likely than not" recognition threshold may be recognized or continue to be recognized. Unrecognized tax benefits are re-evaluated quarterly and changes are recorded based on new information, including the issuance of relevant guidance by the courts or tax authorities and developments occurring in the examinations of our tax returns. We expect our 2023 annual effective tax rate to be between 22.5% and 23.5%. Our effective tax rate calculations are revised every quarter based on the best available year-end tax assumptions, adjusted in the following year after returns are filed. Tax accrual estimates are trued-up to the actual amounts claimed on the tax returns and further adjusted after examinations by taxing authorities, as needed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Results, Liquidity, and Capital Resources - Market Risks and Other Significant Risks, as well as Note 1(o), Fair Value Measurements, Note 1(p), Derivative Instruments, and Note 1(q), Guarantees, for information concerning potential market risks to which we are exposed. 2022 Form 10-K 51 Wisconsin Electric Power Company
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